Preparing your heirs

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The biggest threat to your family legacy has nothing to do with taxes

Planning for wealth transfers between generations has traditionally centered on minimizing estate tax consequences. But there is overwhelming evidence that tax strategies, while essential, aren’t enough to satisfy many wealthy families’ primary goal: to sustain wealth across multiple generations.
Communicating effectively about wealth and financial decisions presents a challenge, making it overwhelming to engage the next generation around financial issues. Many traditional education curricula fail to effectively connect with a younger, digitally native generation, limiting their tools to understand wealth and handle it responsibly. According to a study by the wealth consultancy The Williams Group, 70 percent of families lose their wealth in the second generation, 90 percent in the third.
It’s a tough lesson: The best tax planning is wasted if the heirs are not prepared. This is particularly resonant among today’s increasingly complex families, which can span second or third marriages, blended families and nontraditional relationships. When families become more complex, they’re more likely to have splintered ideas about how to define family goals and values. They need a comprehensive wealth transfer plan that tackles “softer issues” that can’t always be quantified or referenced in the tax code.
Here are some things that can help prepare the next generation(s).
Communication. Start with a regular annual or semi-annual meeting with an outside facilitator that focuses on communication between family members and education. Personality tests are generally used in the first meeting to establish a foundation on how each member best communicates and makes decisions. Topics include family history so everyone understands how they arrived here, religion, philanthropy, formal education and preserving a family legacy.
Families that work best together have activities outside of work. Select mutually interesting, nonthreatening projects that center on philanthropic activities. Subsequent generations should also participate in the family philanthropic vision, fostering communication and connection to the family values. Strengthening lines of communication is essential to minimize conflict and maintain a healthy family dynamic.
Education. Every family member has their own educational needs and learning styles. Usually through the family’s advisers, everyone may establish their own independent relationship, and learn at their own pace how to balance a checkbook, manage their cash flow, follow their investment statement, understand their trust documents and work with a prenuptial.
Governance. Establish a family leadership council separate from the family business, led by family members of various generations. Family advisers may be engaged for specific expertise or be a guest speaker. Attorneys, accountants and investment managers are obvious choices, but also include executive directors from not-for-profits or members from other wealthy families to share best practices.

If there is a lack of communication, education and governance within a family, the family legacy is at great risk over the long term. Think wisely about how to best prepare your family and ensure a successful wealth transfer plan.

Ronald Ambrogio is Regional President – Ohio, at BNY Mellon Wealth Management.
The information provided is for illustrative/educational purposes only and is not intended to constitute legal, tax, investment or financial advice. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation. BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation.